Are You Setting Smart Prices?

Did you know the average brain has 100 billion neurons all passing signals to one another through a thousand trillion synaptic connections? That’s roughly equivalent to a computer with a 1 trillion bit per second processor (The Human Memory, 2017). What a fantastic and truly epic piece of engineering we are! And what a nightmare we represent for marketeers and salespeople who would love to know exactly how we think and how we make buying choices.

To navigate this maze, we seek to simplify the problem. In this instance marketeers construct cognitive models to try and replicate our insanely complex decision making processes. If they can crack this conundrum they can perhaps understand exactly how an individual will behave and by extension (among other things) what price they are prepared to pay. Thankfully, no one has the means to accurately read our minds and exploit the content. Whilst the thought police remain fictional for now, cognitive modelling is nothing more than a best guess of what might be happening in a massively simplified model of reality.

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Even asking customers directly their intentions is fraught with danger. Sharp (2011) identifies a weak correlation between shopper’s intentions and actual buying behaviours. When we apply science to marketing, it would seem that either inadvertently or deliberately (or both) shoppers don’t tend to do what they say they will do. So whilst it is important to listen to customers, we all view the world through our own distorted lenses.

So what is the answer? Are businesses doomed to take a “cost plus” approach to pricing and throw a blanket over their customers? By doing so, they concede they will lose money both by:

• Pricing some customers too high (lost sales)
• Pricing some customers too low (lost margin)

Both of these inefficiencies represent lost profits for companies where they create value but cannot realise it.  But just like poker, you don't get to see the other players hand after the play. You never know at what price the lost sale would have been an order, or how much more the buying customer would happily have paid.

Many firms segment their markets and most have pricing tiers of some sort. They seek to make sense of an intensely complex and dynamic challenge by categorising shoppers into groups. It is an understandable approach and it does genuinely seek to capture more of the value that a business creates than a simple blanket pricing regime. But it also fails to acknowledge human beings as individuals. Just like cognitive modelling, it is another example of businesses oversimplifying something which otherwise seems too hard to fathom.  

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So, again, what is the answer? The starting point is under our noses. Existing sales data is an indelible record of what has actually happened. There is nothing predictive about it. It doesn’t require the untangling of the 100 billion neurons in each customers brain. Just observe how they behave and derive the patterns. We may never know why it all happens, but that doesn’t have to matter. The aim is not to understand and control every variable. If we can make sense of this data, we can make a giant leap towards understanding what will happen in the future and hence where we can (and should) price. There are many empirical generalisations (stable patterns) hidden in historical sales data which can be utilised to inform firms of how customers will behave again. Humans are extremely complex but also habitual and the scientific analysis of customer sales data reveals well worn behavioural pathways.

Nevertheless this is still a complicated challenge. If your business has thousands of products and also customers and exists in a dynamic changing market, then extracting meaningful insight from the data can be daunting. But the lessons are there. Powerful algorithms can be employed to find opportunities for more optimal pricing (higher (more margin) and lower (greater volumes) when fine tuning prices regularly and for periodic price increases due to inflation and other global factors. Getting as close as possible to the price the market will bear at any given time (preferably on an individual basis) should be the goal of any company in sales.

A sophisticated approach to pricing should not be shied away from just because it is hard. It can and should be done! Exciting businesses that do all the work creating value and then fail to cash it in are literally selling themselves short. Brilliant companies that create value have a duty to monetise this value and thrive as a result. They can then go on and create more value to benefit consumers in the future, rather than wither on the vine, unable to harvest the fruits of their labour.

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Today we operate in a highly competitive inter connected global market where businesses that spin their wheels with inefficient sales volumes because pricing has not been properly addressed are in greater jeopardy than ever before.

It is good for the market when value creators succeed and as such, pricing really must be a cornerstone of any “for profit” business strategy. Listen to what your customers say, of course. But concentrate even harder on what they actually do. Deciphering the data they provide is one (of many) great starting points in the quest for smart pricing. 

Learn more at Pricing Insight......

References:

Marketing Science, “Share of wallet isn’t enough”, Viewed 25th July 2017, https://byronsharp.wordpress.com/2011/10/11/share-of-wallet-isnt-enough/ 

The Human Memory, 2017, “Neurons and Synapses”, Viewed 24th July 2017, https://www.human-memory.net/brain_neurons.html